MR. GREGORY: Fourteen months after President Obama swept Democrats to
victory in Congress, could this string of key retirements turn the tide
for the party in 2010? A live debate this morning between the two sides
on the midterm elections and the Obama agenda. Democratic National
Committee Chairman Governor, Tim Kaine of Virginia vs. Republican
National Committee Chairman Michael Steele.

Then, he is governor of the state with the world's eighth largest economy
and a massive $20 billion budget deficit. As Arnold Schwarzenegger
enters his final year as the governor of California, what can he do to
turn his state around? And how does the future of California impact the
rest of the United States? Our exclusive interview with California
Governor Arnold Schwarzenegger.

Plus, Obama's priorities for the upcoming year. How will the shifting
landscape for 2010 affect health care and the economy? And after the
attempted Christmas Day airline bombing exposes ongoing cracks in the
nation's security system, the president promises to keep the country
safe.

(Videotape)

PRES. BARACK OBAMA: I am less interested in passing out blame than I am
in learning from and correcting these mistakes to make us safer; for,
ultimately, the buck stops with me.

MR. DAVID GREGORY: But first, good morning live from Los Angeles. We
have come here to put a spotlight on a state that is on the leading edge
of this country's economic downturn. We'll speak exclusively to Governor
Arnold Schwarzenegger in just a few minutes.

But amid all the political tension in this midterm election year, there
is some news developing this weekend back in Washington. The president
released a statement just yesterday standing behind the Senate Majority
Leader Harry Reid after some racially insensitive remarks Reid made
during the 2008 primary campaign about then candidate Obama were reported
in a just-published book by reporters Mark Halperin and John Heilemann.
Here with us live to talk politics, the chairmen of both political
parties, DNC chair Governor Tim Kaine and RNC chair Michael Steele.

MR. GREGORY: Let me start with those remarks by Harry Reid as being
reported in this new book, "Game Change," about the 2008 race: "[Senator
Reid] was wowed by Obama's oratorical gifts and believed that the country
was ready to embrace a black presidential candidate, especially one such
as Obama--a `light-skinned' African-American `with no Negro dialect,
unless he wanted to have one,' as he said privately. Reid was convinced,
in fact, that Obama's race would help him more than hurt him in a bid for
the Democratic nomination." Senator Reid quickly apologized. He spoke to
President Obama yesterday, who, as I mentioned, issued a statement saying
the case is closed on this, he accepts the apology.

Governor Kaine, is the case closed? Should there be a consequence for
these remarks?

GOV. KAINE: David, I think the case is closed because President Obama
has spoken directly with the leader and accepted his apology. The
comments were unfortunate and they were insensitive. They were in the
context of praising the senator and acknowledging that the senator could
be a great president, but they were still insensitive. I think Senator
Reid stepped up, acknowledged that they were wrong, apologized to the
president. He's accepted the apology, and we're moving on.

MR. GREGORY: Michael Steele, back in 2002 Trent Lott was ousted as
majority leader for racially insensitive remarks. He, at that point,
said that Strom Thurmond, who ran as a segregationist for president, had
he been elected president, that the country wouldn't had--have had some
of the problems over all those years. Then state Senator Obama said at
that point that Lott ought to be ousted as majority leader. Do you see a
difference between then and now?

MR. STEELE: Oh, yeah, there's a big double standard here. And the thing
about it that's, that's interesting is that when Democrats get caught
saying racist things, you know, an apology is enough. If, if that had
been Mitch McConnell saying that about an African-American candidate for
president of the United States, trust me, this chairman and the, and the
DNC would be screaming for its head, very much as they were with Trent
Lott. And, and, and the reality of it is racism and racist conversations
have no place today in America. This, this term--this, you know, you
know, like he's going to pass, for example, for, for white America
because he's, you know, got this Negro dialect that he can turn on or
turn off, and he's light-skinned, that's anachronistic language that
harkens back to the 1950s and '60s, and it confirms to me a mind-set that
is out of step with where America is today. But I can assure you that if
I had, as national chairman, said that, "Well, it's all behind us, and
he's apologized. Let's move on," no one would be accepting that. There
have to--has to be a consequence here if the standard is the one that was
set in 2002 with Trent Lott.

MR. GREGORY: And it--is the consequence that Senator Reid should step
down as majority leader?

MR. STEELE: I believe it is. Well, it--from my perspective, whether he
steps down today or I retire him in November, either way he will not be
the leader in 2011.

MR. GREGORY: Governor Kaine?

GOV. KAINE: Well, first, the senator said--I mean, Chairman Steele said
earlier this week that the Republicans were not going to win it back. So
Leader Reid's still going to be the leader. But I will say, anybody
looking at Trent Lott's statements praising of somebody who had been a
pro-segregation candidate for president will see that there is no
comparison between those comments and those of Senator Reid's. Now, the
senator did make comments that were wrong and insensitive, and he's
apologized. But he made them in the context of promoting the candidacy,
the historic candidacy of Senator Obama.

MR. GREGORY: But--so you don't think, you don't think he should resign?

MR. GREGORY: Let me move on more generally to the politics of the
country and the mood of the country right now.

Chairman Steele, how is the mood around the country?

MR. STEELE: The mood of the country right now is sour. People are
angry, they're frustrated, they're scared. And I think you see and, and
have seen in certainly 2009 elections and you will see this year the
public standing up and saying they've had enough. They're saying no to
more taxes, they're saying no to more government. And as we're about to
celebrate this one-year anniversary of the administration, what do we
have? We have no health care, we have no jobs, we have no money and we
have, oh, $13 trillion worth of debt. That is not lost on the American
people right now, and so they're going to the polls, they're going to
their town halls, they're going to the streets of their--of the country
and they're saying, "Enough." And they're putting the leadership on
notice that, "Pay attention to us. Listen to us. We're telling you
what, what we want and what we don't want." And yet, this administration
and this Democratic Party has a tin ear to the fact that people out there
are hurting. We haven't created jobs, and yet...

MR. GREGORY: Right.

MR. STEELE: ...now we're going to have another conversation about jobs?
That should have been the conversation on the first day, not, you know,
the things that the, the administration's pursued.

MR. GREGORY: Chairman Kaine, it's a very difficult year to be an
incumbent party, as the Democrats are.

GOV. KAINE: Well, David, it's a challenging one. As you know, the
history is this, that midterm elections for presidents, since 1900, the
president would normally lose about 28 House seats, four Senate seats,
lose governors races. But the good thing about President Obama's team is
that they're not used--not--to an uphill climb. We're going to do a lot
better than people think, for three reasons.

First, this president does have a record of success. From day one,
focused on economic recovery in ways that have cut job losses from
800,000 a month now in the last month to 80,000 a month. We're not where
we want to be yet, but thank goodness we have arrested the free fall of
the economy and we see positive signs throughout the nation. We're not
where we want to be yet.

Second, the other side has more retirements than we have. I know we'll
probably talk about that. But just on these retirements this week, 14
House Republicans have announced their retirement, 10 Democrats; six
Republican senators have announced their retirements, two Democrats; four
Republican governors have announced their retirements, two Democrats.
That's going to help us.

And finally, the Republicans have demonstrated that they're not ready to
lead, from saying no to everything to having an internal battle among the
party chasing Arlen Specter out, chasing Dede Scozzafava out of the
race, the Republican nominee in the congressional race in upstate New
York.

MR. GREGORY: All right, let...

GOV. KAINE: Just this week, kicking out the Florida GOP party chair, and
many mainstream Republicans facing primary battles or censures, like
Senator Graham. There's a civil war that's corrosive on the Republican
side that is going to enable us to do a lot better than many folks think.

MR. GREGORY: Chairman Steele, earlier this week you said you didn't
think that the Republican Party could retake the majority in Congress in
2010. If you think President Obama's doing so poorly, why did you say
that? Why do you believe it?

MR. STEELE: Well, no, the, the rest of that was if we're not prepared to
do it, if we don't have principal candidates out there running as, as we
need to. And we have those candidates, we have those individuals out
there who are already making a mark. Look, I'm excited about the fact
that we're, we're going to engage in a, in a very healthy battle and
campaign this year. Look at what we did in 2009. We won New Jersey
governorship. We won the governorship of your state. You know, the
reality of it is we have candidates with ideas that people want to pay
attention to and follow. Right now in Massachusetts Scott Brown is doing
a valiant effort by listening to the people of Massachusetts and talking
to them about commonsense agendas that empower them from the bottom up,
not government down.

MR. GREGORY: Well...

MR. STEELE: So the, the reality of it remains this.

MR. GREGORY: All right, I just want to be clear.

MR. STEELE: This administration has, this administration's put some
things on the table that have turned America off. The question isn't
whether the Republicans take the House back, it's whether or not the
Democrats can keep it. And right now they can't.

MR. GREGORY: Let me be clear. Chairman Steele, do you think Republicans
will regain control of Congress, yes or no?

MR. STEELE: Absolutely. Absolutely. The rate we're going now, the,
the, the ground game we're putting in place, we absolutely can take the
Congress back this, this year. There will not be a 60-seat majority for
the Democrats come January of next year. There's parity that's going to
be created, and the, and the Republicans are going to create that parity.

GOV. KAINE: David, let me go right back to what Chairman Steele said
earlier this week. He said that the Republicans were not going to take
Congress and he said why. He said it's because they're not ready to
lead. We see that over and over again, a philosophy that just says no to
everything that stands by and watches...

MR. GREGORY: All right, I want to get, I want to get into some specific
issues.

GOV. KAINE: ...a country in free fall is not what the American public
wants.

MR. GREGORY: All right, hold on, let me--I want to interject some
specific issues and have some, some narrow or targeted responses on
particular issues.

You'll hear from Governor Arnold Schwarzenegger in a few minutes,
Governor Kaine. One of the things he says, and, by the way, he was an
early supporter of the notion of healthcare reform; the White House was
relying on him. He says that the burden that healthcare reform that's
coming down the pike will, will take the burden it places on states is
onerous, that it's akin to beating up on a state like California, which
has a $20 billion shortfall, because of the mandate to expand the
Medicaid rules, roles, including some other demands on the states.
You're a governor. Do you understand what he's saying?

GOV. KAINE: David, I do. But I've looked at this very carefully in
connection with the Virginia budget, and I think what is often missed is
that there's going to be some cost to state to expand Medicaid, but then
that will take huge financial burdens out of state budgets that we're
incurring right now to take care of those who are uninsured. Virginia is
an example. We have over a million, 1.2 million Virginians that are
uninsured, and we spend hundreds of millions of dollars every year to
take care of them in the emergency rooms for serious emergency treatment
that could have been prevented under this health reform bill. For
example, preventive care is no co-pay. So we're going to move toward
prevention, state budgets are going to save dollars that we're spending
now to try to pull people back from the brink of sickness that they
needn't be suffering under with a better healthcare system. I think...

GOV. KAINE: I think Virginia stands to benefit, much as do other
American states, from finally passing meaningful healthcare reform.

MR. GREGORY: Chairman Steele, do you think it will help Republicans in
the fall to campaign against Obama's healthcare reform?

MR. STEELE: Absolutely, because it's a boondoggle. I mean, it's loaded
with taxes, it's loaded with government intrusion and regulations, it's
loaded with, you know, debt that is going to be passed on to future
generations. Like Governor Schwarzenegger, Governor Kaine is passing on a
$4 billion deficit to his, to his successor. Where do you think that
deficit comes from? It comes from the weight that's put on states by
unfunded mandates from the federal government. If you bought into
the--to this healthcare plan in the first place when you signed on took
some of the, some of the early money, there were strings attached to
that. You have states that are now going to be burdened in the future to
fund programs that the federal government said, "We'll do today, but you
carry the weight tomorrow." This is the reality that a lot of governors
around the country are facing, and you're going to layer on top of that a
healthcare boondoggle, an experiment that no one can tell you what it's
actually going to cost.

GOV. KAINE: David...

MR. STEELE: We're now hearing that it's, "Oh, it's going to be a little
bit more than we thought it was going to be."

MR. GREGORY: All right.

GOV. KAINE: David...

MR. STEELE: People realize what's going on here.

GOV. KAINE: ...let me, let me focus on it, because I think you've asked
an excellent question. Will the campaigns of 2010 be heavily focused on
health care? You will have the Republican Party campaigning to repeal
this historic health bill that will pass. You'll have me and my team out
promoting it. I want to have that campaign. I want to face a Republican
Party chair in leadership that says "No, we need to go back and let
insurance companies kick people off who are sick." I want them to go
explain why 47 million Americans are uninsured and why the costs will
continue to escalate to break...

MR. GREGORY: Gentlemen, let me leave healthcare there for a minute. I
have a couple minutes left, a couple of issues I want to address.

Chairman Steele, you have a new book out, the 12 steps to take on the
Obama agenda and defeat the Obama agenda.

MR. STEELE: Yes.

MR. GREGORY: And you talked about making it very clear that there'll be
penalties for certain conservatives who don't espouse conservative
values. But your leadership has come under some question this week.
Whether it's statements that you've made...

MR. STEELE: Yeah.

MR. GREGORY: ...like earlier in the week saying you wouldn't take back
control of Congress. You picked a fight with Rush Limbaugh earlier in
the year. You said abortion was a choice. People have questioned you
taking money for speeches and even taking money for writing the book, and
you said this week, "If you don't want me in the job, fire me, but until
then shut up," to your Republican critics. Are you an effective leader
of the Republican Party?

MR. STEELE: I, I am. I think I am a passionate leader of this party.
I'm a, I'm a grassroots guy. I grew up here in the streets of D.C. At
17 decided to become a Republican, and I've been fighting that fight ever
since. I believe passionately in those principles that have--that drew
me to this party. And I, and I, I get angry sometimes when we walk away
from those principles. I get angry and frustrated when I see those
principles not being regarded because they have been the foundation for
generations. And the reality of it is, as chairman, I've raised $80
million this year. I've, I've won two gubernatorial races that no one
thought I could, could win, one in his backyard. I, I, I've got 370,000
new donors to the party. I've got $8 million cash on hand when the
budget I inherited said I would have zero, I would have debt. I have no
debt. They have debt. I have the same amount of money, cash on hand, as
my partner here who had the White House, both houses of Congress, $8
million, going into this year. So I think overall I'm doing OK.

MR. GREGORY: Final question, Chairman Steele. Is the Republican Party
guilty of politicizing terrorism right now?

MR. STEELE: Absolutely not. Dick Cheney has it dead right. This
administration has not put out a clear vision of how they're going to
handle national security and what--were going to, were going to
stop--close Gitmo, not done. We're surprised and amazed that the dots
weren't connected on what happened on December 25th. The American people
don't trust the direction this is going. If you can't call a thing what
is, and that is terrorism, people wonder if you know what to do with it.
And that's where we are right now, and it's not the place to be.

GOV. KAINE: The president's approach to terrorism has been praised by
many of the Bush administration leaders across the board from the day
he's come into office. When the incident happened on the air flight into
Detroit, it was only a matter of days before Republican leaders were
trying to use it in fundraising letters, making all kinds of outrageous
claims such as the president never uses the word terror. As you know,
that's ridiculous. He uses it all the time in speeches. They've been
claiming that the way that this, this recent suspect is being treated is
contrary to what should happen for national security. The case is being
treated exactly the same way...

GOV. KAINE: And so this is an instance where the president's doing the
right thing. The Republicans are just looking for an excuse to raise
money and politicize it. This president is going to unify Americans and
keep us safe...

MR. GREGORY: We're...

GOV. KAINE: ...than play political games.

MR. GREGORY: We're going to leave it there. The debate will continue in
this hot political year.

MR. GREGORY: ...and Chairman Kaine. We will come back after this. And
have more with Chairman Steele, I should point out, in our MEET THE PRESS
Take Two Web extra. It's up this afternoon. You can also read excerpts
of "Right Now: A 12-Step Program for Defeating the Obama Agenda." Plus,
look for updates from me throughout the week. It's all at our Web site,
mtp.msnmbc.com.

And up next, yesterday I sat down here in California with an exclusive
interview with Governor Arnold Schwarzenegger. We'll talk about how he
plans to tackle California's massive budget deficit. Plus, our political
roundtable with NBC's Andrea Mitchell and Chuck Todd, only here on MEET
THE PRESS.

MR. DAVID GREGORY: And we're back with our special broadcast from
California.

Governor Schwarzenegger, good morning.

GOV. ARNOLD SCHWARZENEGGER (R-CA): How are you today?

MR. GREGORY: It's always, it's always nice to come home to California.
Thank you for having us.

GOV. SCHWARZENEGGER: Absolutely.

MR. GREGORY: This has been a big week for you with your State of the
State message and a new budget. And 2010 begins in a challenging place
for a lot of states, including California, in this economy. Do you feel
like the worst is over?

GOV. SCHWARZENEGGER: I think that economically the worst is over. I--we
see a little comeback when it comes to job creation. We see also that,
you know, homes have been sold again and that home sales are up, and I
think that very soon you will see construction again and, and new homes
and so on. But when it comes to the financial crisis that California is
in, I think we're not out of the woods yet, as I said in my State of the
State and in my budget speech, in that we still have a tough road ahead
of us. And this year is one of those tough years.

MR. GREGORY: And for the country as well. When you think, not just
about California, but the country and economic recovery, what do you
think is the biggest threat to that recovery? Is it unemployment?

GOV. SCHWARZENEGGER: I think that we have to get the economy back. I
think that we have to have money available, loans available so businesses
can expand again and people can buy homes. I think that we just have to
get the jobs back as quickly as possible. That's why we have tax
incentives for people that want to buy new or used homes. And we just
want to do everything that we can as a state and as a country to
stimulate the economy. That's the key thing because I think that the
worst is when people lose their jobs and they have to go home to their
family and say, you know, "I have no more money. We cannot provide for
the family," and so on. Or when both of the parents lose their jobs, it
gets even tougher. And that's as--is the case in a lot of families. And
so we have to do everything that we can. That's government's
responsibility to stimulate the economy and to help.

MR. GREGORY: The federal government is spending a lot of money in
stimulus, preparing to do so on healthcare reform, if that gets passed.
And there's a lot of talk about taxes, whether taxes will be necessary on
the national level, or even when you're facing a $20 billion shortfall.
David Ignatius wrote something, a columnist for The Washington Post, that
caught my attention, and he wrote, "What worries me, looking ahead,"
thinking about the whole country, "is what might be called the
`Californiazation' of America - the growing tendency of our political
system to make promises in social spending programs that it isn't
prepared to pay for with tax increases." Think about California. How can
you stick to a position, as you do, that tax increases are not the way to
go?

GOV. SCHWARZENEGGER: Well, first of all, we have no option because if
you do the tax increases, you immediately kind off stifle the economy.
So right now, where we try to get the--where we see that the economy's
bottomed out and it has a chance now to come back, to go in now, to hit
the state with more taxes will be the wrong thing to do. So what you
want to do is you want to do the opposite. You want to go and put money
into the economy and you want to go and give tax incentives for
businesses, for new hires, as we did, or for retraining people or for
homebuyers' tax credits and so on. So I think that it would be a big
mistake. I think that the, the thing that politicians should not do is
promise things they can't keep in that they have no funding mechanism to
go and follow through with those promises. Like, for instance, in
California, with the pensions, the public employees' pension. I mean,
it's a disaster because in the, in the late '90s, they were promised
things that there's no way the state can keep those promises. And that's
why I said that we have got to get Democrats and Republicans together
and, and fix this problem, because right now we are paying already more
than $3 billion towards the pensions, and eventually that amount is going
to go up to $10 billion. That's money that's being taken away from very
important programs--universities, schools, health care and all those kind
of other things.

MR. GREGORY: When you think about the federal government's budget, which
doesn't have to be brought into--to alignment the way a state budget,
like California's, do you think taxes have to go up to pay for stimulus,
to pay for health care?

GOV. SCHWARZENEGGER: I think that the government has to live within its
means. And, of course, the big advantage that the federal government has
is they can ran up--run up those deficits and they can print more money,
whereas the state can't. And I try to tell the people in California,
when you have $85 billion in revenues available, that's all you can
spend, that's end of that, even though they may want to spend $104 [billion] or $105
billion. And so you have to make the necessary cuts because we've got to
live within our means. We cannot print more money in this state. We
cannot go and run up those deficits, as the federal government does.

MR. GREGORY: You called some of the cuts that you put forward in your
budget draconian cuts, by your own admission.

GOV. SCHWARZENEGGER: Mm-hmm.

MR. GREGORY: One of the things you said so strongly is the federal
government has got to come to California's aid. What do you mean?

GOV. SCHWARZENEGGER: Well, it's not so much coming to our aid. The
federal government owes us billions of dollars. You see, there's a
difference. I mean, in California, one's got 94 cents to the dollar that
we're putting in on federal taxes. Now we only get 78 cents. But you
have places like, for instance, Alaska that gets $1.86. You have New
Mexico that gets $2.03. So we are subsidizing those states. And that is
the thing that is unfair. So what we're saying to the federal
government, "Look, you are responsible for our border security. You're
responsible for immigration and for all of those kind of things that, you
know, you--if you fix those problems, if you help us, you know, with the
incarceration of undocumented immigrant, which costs us almost a billion
dollars, yeah, then we can talk. But right now, you're not wanting to
pay any of those things." So it is unfair that we are paying in $1 and
getting back 78 cents on the dollar. And so we tried to fix that, and
it's not a bailout at all. It's just being fair, and it's federal
fairness, not federal bailout.

GOV. SCHWARZENEGGER: I think the stimulus was very helpful to
California, and I think that--I was a big supporter of the stimulus
package. I think they have given us money, and--if it has to do with
transportation or with high technology and with all kinds of different
things, with our universities and so on, so we were very appreciative.
But it's one-time money. One should always know the difference between
one-time money and ongoing money. One-time money, that's here today,
gone tomorrow. Ongoing money, when I talk about, you know, increasing
the level from 78 cents to 90 cents, that's an ongoing thing. Or when we
talk about health care, that you have health care where we are owed
billions of dollars in health care, that's ongoing. So we want to make
those adjustments with the federal government and work with them so that
it's more fair.

MR. GREGORY: What happens if California doesn't get the money that you
feel it deserves from the federal government? What then?

GOV. SCHWARZENEGGER: Well, first of all, you know, I never really think
so much about the Option B because it's a loser's attitude. I think you
always have to just think about--even though it has been difficult up
until now to get that money, we've been fighting for it for six years,
but we never give up. And it's just like with the redistricting reform.
Journalists always ask me, they say, "Well, wait a minute. It has lost
now five times. Why are you back the sixth time with redistricting
reform? Don't you get it that the people vote no?" And I said, "No, I
never give up." I come from the sports background. Just because you
didn't lift the weight one time, did you give up, never try it again?
No. There's no such thing. So we're going to be back.

And then in, in redistricting reform the sixth time, we won. And the
same is with this. We will never give up. We continue pushing. This
time we're going to go back with the four legislative leaders of
California, Democrats and Republicans alike, and keep pushing and talking
to the federal government and letting them know that it is unfair the way
the money's being distributed right now. And so we also will inspire and
push extra hard the California congressional delegation, the bipartisan
delegation, because they're not being--representing us really well in
this case. I mean, you know, if you think about that the Senate just
voted for a healthcare bill that is saying basically that California
should pay for Nebraska so that Nebraska never has to pay any extra
money, and we have to...

MR. GREGORY: To expand the Medicaid rolls?

GOV. SCHWARZENEGGER: To expand the Medicaid. And so if--we have to pay
$3, $4 billion extra for those states?

MR. GREGORY: You said the president should rethink healthcare reform.

GOV. SCHWARZENEGGER: Absolutely, because that's not healthcare reform,
to go and to put that extra burden, billions of dollars, on other states,
especially on California. Just because we're the best state in the world
and the best place in the world and we are the most diversified economy
and everyone wants to come to California is no reason to beat up on
California and to always ask for more money from California.

MR. GREGORY: Do--is that how you...

GOV. SCHWARZENEGGER: I think it's time for the federal government to go
and do--take care of us.

MR. GREGORY: Is that how you think about healthcare reform as something
that ultimately would beat up on California?

GOV. SCHWARZENEGGER: Yes, it is. Right now it is. And I just cannot
imagine why we would have, like I said, you know, for instance, you know,
our senators and congressional people, how they would vote for something
like that where they're representing Nebraska and not us. And by the
way, as I said in my State of the State, that's the biggest rip-off. I
mean, that is against the law to buy a vote. I mean...

MR. GREGORY: The federal government will pay for their Medicaid
expansion.

GOV. SCHWARZENEGGER: "I'm holding out my vote unless I get some extra
kind of benefits here." I mean, if you do that in Sacramento, you know,
you will be sued. It is illegal to do that, to buy votes.

MR. GREGORY: Can I ask you a couple more California issues?

GOV. SCHWARZENEGGER: Yeah.

MR. GREGORY: One of the things you talked about that got a lot of
attention is your pledge to move money out of the state budget from
prisons into higher education. I don't have to tell you, the, the
University of California system has raised fees for students. What is
the future of education in California?

GOV. SCHWARZENEGGER: I think the future of education in California is
great. I think we still have the best university system in the world.
The key thing is that we reform education from kindergarten through 14,
especially kindergarten through 12th. Because it is inexcusable for what
we had up until now, and we were fighting to change that for years now,
and finally we were able to change it. Just the other day I signed
legislation to reform education. It's inexcusable that children get
stuck in low-performing schools and you cannot get them out without the
school principal's permission. Of course the school principal will never
give you the permission, because it will be--he will be losing money if
he lets a kid go out. So they are stranded--they're strapped there. As
I said, it was like a chain in the exit door--on the exit doors. And now
we finally changed that. Or, for instance, that parents cannot be
involved in the schools, cannot be involved in which direction a school
or education should go. Now they have, with that reform, they have a
chance to turn low-performing schools or failing schools into charter
schools or close the school down or move the kids out of the school or
fire the school principal or teachers and so on and so forth. So those
are the kind of things, those are the kind of reforms we need to do. And
I'm glad that finally both parties got together and created those reforms
that we have been fighting for for years. And here's a good example of a
good relationship with the federal government, because the Obama
administration was very instrumental--Arne Duncan, the Education
secretary, to push the states to say, "Here's $4.3 billion for you guys.
You can apply and compete for this money." And we can get $700 million,
so that kind of put it over the top. So there, there was, you know, the
federal government very helpful in this.

MR. GREGORY: Let me ask you a little bit about President Obama. Do you
think he's doing a good enough job keeping America safe?

GOV. SCHWARZENEGGER: I think that he's doing everything that he can. I
think that, you know, Democrats a lot of times get the rap, you know,
they're not strong on security and all of those kinds of things. I think
that he has talked about the issues, I think that he's been fighting for
the issues. This was an unfortunate situation of what happened over
Christmas, and I think that it's a total failure in the communication
within the departments. Let--when you look back, all of the instances
that are happening, it's always been to say, "Well, we, we, we had
everything in place, but we didn't pass on--the dots were not connected,"
or something like that. It's not like the president has done something
wrong, or because he was in Hawaii or anything else. It's nothing to do
with that at all. What it has to do with is just simply they didn't
connect the dots. Within the agencies, within the airport authorities
and Homeland Securities and the CIA and everyone else, they just don't
connect the dots.

And we have--we had this problem before we started creating Homeland
Security also here in California. Where California, the law enforcement
did not really communicate well with the FBI. They didn't want to give
them certain information, and the FBI didn't want to give information to
law enforcement, all of this, all this territorial fighting going on.
And I think that that has to get--we have to get rid of that problem and
connect the dots. Other than that, I will say we have very smart people
in the leadership. It's just working together is always the hardest
thing to do.

MR. GREGORY: Working together. As you come to the, the last year of
your tenure as governor, where do you fit in the Republican Party of
today?

GOV. SCHWARZENEGGER: I'm a reformer. I'm an independent reformer. I
came into this job here saying that I want, want to be the people's
governor, not the Republican Party's governor, but the people's governor.
I want to represent Democrats and Republicans. I want to do everything
that I can to bring Democrats and Republicans together. That's why I've
been talking so much about post-partisanship, bipartisanship or none
partisanship. I think it's extremely important, the action is, to bring
both of the parties together and to look at what they can do together
rather than to just talk about what they want to fight over. Let's do it
together. Let's go in the beginning of the year and say, "Here are the
things that need to be done," and then get them to work together on those
things.

We, in California, even though California is known as a state that is not
governable--it is very hard to govern in California, probably the
toughest state to govern in the United States, but still we got a lot of
things done. I mean, I'm very proud--when you look--I always run around
with this list, David. And I put this down: workers compensation
reform, done; budget reform, not done. We still have to fight for that.
You know, rebuilding our levees, rebuilding our roads, rebuilding our
schools, more affordable housing, rebuilding our prisons, water
infrastructure, those things were done. But then tax reform was not
done. You know, campaign finance reform was not done. Open primaries was
not done. So, you know, I think that we have a lot of things we got
done, even though Democrats and Republicans fight. But I think it is
much easier when people take party out of the way. And I know it is very
hard to do, but you got to be a servant to the people, not to your party.

MR. GREGORY: Do you think the, the Republican Party is doing that of
today, nationally?

GOV. SCHWARZENEGGER: I think both of the parties are not doing that
because it is so political. It's more--they're thinking more about the
party than about the people. And I think that as soon as both parties
come together and have regular meetings and say, "What can we accomplish
together," rather than just worrying about, "How do we get elected?" and
"How do we get more people elected for the Republican Party?" and how to
get more elected for the Democratic Party, all of this--I know it's part
of politics to do that. But I think that we should tone that down and
lift up of what is important, really, and for the people. Look, this
country need to rebuild itself. We are still living off the Eisenhower
era and off the Roosevelt era when they built the thousands of bridges
and the thousands of government buildings and the roads, the highway
system and all of those things. What's the new thing that we're
building? We haven't built anything in decades. We need a high speed
rail. We need new infrastructure. We need to think about it because we
have countries like China and Europe that are very fast gaining on us and
surpassing us. So we got to get our act together and really make this
country kind of live in the 21st century, not be with the infrastructure
in the 20th century.

MR. GREGORY: As you look at the political landscape nationally, given
your views about the party, do you think the Republican Party's poised
for some big gains in this election year?

GOV. SCHWARZENEGGER: Without any doubt. But not because some miracle
was happening that they did or that the Democrats didn't do. That's--by
nature, you always see that; that, you know, there's a huge momentum--two
years ago it was a huge momentum for the Democratic Party because the
Republicans were in charge for so, so many years. And they've done a
good job, the Republicans. But it--the momentum of swinging the other
way, and so the Democrats got all the votes. So now I think the pendulum
is coming back and it's going the other way, and I think that the
Republicans are really going to benefit this year from that. And, you
know, they will have then a chance to come up with some good ideas and
how to go in the right direction for the country.

MR. GREGORY: Final question: What's ahead for Arnold Schwarzenegger?
Is it politics or is it Hollywood?

GOV. SCHWARZENEGGER: I don't even think about my next move at all. I'm
thinking about this year. Because there's so much, so, so much
opportunity this year in tax reform and budget reform, and to really move
the state forward in the various different areas that we need to move the
state forward and bring in both of the parties together and to get our
infrastructure, the water infrastructure passed. (Loud noise off camera)
Pay no attention, it's just a little earthquake.

GOV. SCHWARZENEGGER: See, see, in California, when there's a noise, the
governor never shakes or worries about it because earthquakes happen all
the time.

MR. GREGORY: Right, right. I'm an L.A. guy. You think I would have...

GOV. SCHWARZENEGGER: You're an--from L.A., exactly. That's right,
exactly. But anyway, so that's the bottom line. I am not thinking about
myself, I'm thinking about the state. That's the key thing. And then
when I'm finished, then I can always think about myself.

MR. GREGORY: All right. Will you run for political office again?

GOV. SCHWARZENEGGER: Well, you never say never. But, I mean, you know,
right now I have no plans, period.

MR. GREGORY: Governor Schwarzenegger, thank you very much.

GOV. SCHWARZENEGGER: Thank you.

MR. GREGORY: Appreciate it.

And coming next, a look at the 2010 political landscape. Plus, the
president's priorities for the coming year and his plans to keep the
nation safe after the attempted Christmas Day terror plot. Insights from
our roundtable, NBC's Andrea Mitchell and Chuck Todd join us here in Los
Angeles after this brief station break.

MR. DAVID GREGORY: And we're back with our special edition of MEET THE
PRESS from California. And joining us now, our chief foreign affairs
correspondent, Andrea Mitchell, and our political director and chief
White House correspondent, Chuck Todd.

Thanks both of you for coming out here. And you heard Governor
Schwarzenegger, he is on the front line of what a lot of states are going
through, which is a 2010 that looks a lot like 2009, which is horrendous
when it comes to their budget.

And, Chuck Todd, you ask him about healthcare reform, he is not happy
about what appears to be coming down the pike.

MR. CHUCK TODD: He, he was not, and that should actually have the White
House very frustrated a little bit. They've actually counted on
Schwarzenegger being one of the few Republicans that they can get to
stand behind him, behind the stimulus, behind some other things that
they've tried to do. And here he was just hitting them hard over this
deal they cut with Senator Ben Nelson. I mean, you could see a vein pop
in Schwarzenegger's neck. Very upset, this idea that somehow Nebraska's
going to get exempted from any new federal government Medicaid mandate
costs, while the other 49 states have to pay for it, and California in
particular. Look, this budget problem is going to be what the bank
bailout was in '09 for, for President Obama, the state bailouts could be
in 2010 for him. This could be the big thing that nobody's going to
like, everybody's going to say is unpopular, but maybe the government
will have no choice but to do it.

MR. GREGORY: And, and he talked about health care sort of akin to
beating up on California at a time when it wants billions of dollars in
repayment from the federal government.

MS. ANDREA MITCHELL: Here you've got a Republican governor who is
nonpartisan. He was defending the president on a lot of other things,
the terror war, but basically saying that the Democratic senators and
representatives from California should not have voted for this. Now Ben
Nelson backing off, saying that they should do a fix where every state
gets their full Medicaid bill paid for. That's another $25 billion to
$27 billion. They've got a real problem here, and they were counting on
governors like Ed Rendell from Pennsylvania going out and trying to drum
up support for health care. They're sending Bill Clinton to the House
Democratic caucus the end of this week trying to get him to do what he
did in the Senate side, "Vote for this or you will lose next year as we
lost in 1994 in the midterms."

MR. GREGORY: And, Chuck, here, here the president faces unemployment at
10 percent. This week more jobs lost, it stays unchanged at over 10
percent. Mark Zandi, who's an economist who--with Moody's
Economy.com--the White House consulted with him--he says unemployment
will go up to 10.8 percent by October. The president wants to fight the
deficit, but you've got states like California and other states saying,
"Hey, we need more stimulus. We need more federal help here," even
though Governor Schwarzenegger says it's not a bailout.

MR. TODD: Well, right, he did say that. But, look, they are working on
a second stimulus. The White House just is afraid to call it that,
right? It's this about $200 billion, $250 billion. It would be some
transportation things, some different things to just try to boost things
along a little bit. But they're going to have no choice. This state
budget crisis, I think, is something folks don't appreciate these--most
of these states--look, as Governor Schwarzenegger said, he can't print
money. He's got no choice. They can't run deficits, they have these,
they have these constitutional mandates to balance their budgets and all
of these big states are going to get hit. And the thing is, when you're,
when you're hearing about school days getting shorter, when you're
hearing about school years getting shorter, boy, that is just politically
so unpopular. So you can just see how the pressure gets applied to
Washington, to Congress. It's not going to be popular, but they're going
to feel they have no choice.

MR. GREGORY: And, you know, Andrea, it's 2010, it's an election year,
and a lot of people are looking up and saying, "Government isn't
working." That's what Barack Obama ran on.

MS. MITCHELL: And so you not only have the change hasn't worked in the
perceptions of a lot of people with this high unemployment. And the real
unemployment rate, many say, is 17.3 percent. People have given up,
they're no longer even trying to get jobs. That's even worse. But that
there's a whole anti-incumbent fervor out there, and there are more
Democrats at stake than Republicans. So the Democratic Party is facing
the, the reality that in 2010, if it doesn't start to change, they are
going to feel the anger, the anger that the tea party advocates really
epitomize.

MR. TODD: And, you know, really quickly, David, watching your interview
with Governor Schwarzenegger, it reminded me it's almost as like could
that be President Obama in six years? You saw this frustration in
Governor Schwarzenegger. He came in on the recall effort. One could
argue it was sort of a precursor of this tea party movement, this idea
that people are sick and tired of government not working here in
California. They said, "You know what? We're going, we're going to
actually recall the governor," and it was unprecedented at the time.
"We're going to bring in this outsider who really thinks he can just
change everything, bring in a new face." And he's--you saw him. He whips
out his list, the only...

MR. TODD: ...it's only about half done, and you see that that was what
President Obama tapped into was, candidate Obama, this idea he's going to
be a new face, he's going to be able to do all these things and bring the
parties together in a way that can't be done. And I think in his first
year he's probably going to have this list. And you wonder is--does that
go to what your question was, which is government--maybe these places are
becoming less governable.

MR. GREGORY: And Governor Schwarzenegger said, you know, the problem is
you say you're going to do something and then you do it and it's
unpopular. Look what President Obama has had to do in terms of bailouts,
Wall Street, the auto companies. He's had to do things. Now, there's a
debate about whether he should have done all of those things, but he, he
takes unpopular positions because of the crisis, and that's what he faces
about whether government is ultimately making things better.

MR. TODD: Well, and that--and then politically the White House will say,
"Look, you know, if we'd taken a poll we wouldn't have bailed out GM. We
know that that's unpopular."

MR. GREGORY: Right. But he had to do that.

MR. TODD: Over time they think that as long as he's got the personal
credibility still with the public, they may be disappointed in all of
these things that he's doing, but that somehow this personal credibility
and that if--when the aircraft carrier finally turns that they think
maybe he'll get some credit from that. But...

MR. GREGORY: So let's talk about the political landscape then, Andrea.
This week the announcement of some prominent retirements. Chris Dodd in
Connecticut, he faced a tough race. Byron Dorgan in North Dakota.
Governors as well. Democratic governors in the Mountain West where
Democrats were making such gains, they're now saying they're not going to
run. What does it mean?

MS. MITCHELL: Well, certainly the Byron Dorgan decision in North Dakota
was a stomach-punch because they're not going to be able to hold that
seat most likely, especially if the popular Republican Governor John
Hoeven runs. Chris Dodd's decision was actually a blessing for the
Democrats because they were going to have to write off that seat. He was
running so far behind in his race, and now they could be competitive if
the, you know, fairly popular veteran attorney general turns out to be on
the stump as he has been as attorney general. So the Democrats could
hold on to that seat. But it taps into what you were talking about.
There is a feeling of--there was so much promise and hope only a year
ago. And now, because of continuing economic woes, all of the bailouts,
the problems on the terror front, government is not working the way
people expected it to.

MR. GREGORY: And I, and I talked to a White House adviser, Chuck, this
week who said the problem for this president with independent voters is
that feeling that, "Hey, I may believe in this guy, but he can't solve
these huge problems." The debt, you know, government working overall, you
know, Wall Street, he can't prevent the little guy from getting hurt by
all these forces.

MR. TODD: Well, and it's--there's this snowball effect. You say what
these retirements mean, and, you know, individually the White House was
trying to push back saying, "Well, look, the Dodd thing is a blessing,"
and politically it is. And the Dorgan thing, "Well, he was going to lose
anyway had the popular Republican governor run. And Ritter, he was
running a bad race. We're now going to get a better candidate there if
the mayor of Denver runs." And you can explain all that away, but it does
lead to this idea that, you know, these guys would be running if they
thought they were going to win.

MR. TODD: I mean, and the fact is the landscape stinks, and it is
because you have a combination of things. You have Democratic base not
fired up the way they were in 2006 and 2008. Independents, which you
just mentioned about that the White House realizes, they're disappointed.
Now, the question is, do they show up and suddenly vote with the
Republicans, which then would create a Republican wave and a tsunami and
they probably would take control of everything. Or do they just not show
up at all out of frustration at the entire system?

MR. GREGORY: Now let's--as we talk about Republicans a little bit,
because Republicans can't necessarily take all of this to the bank. If
you look at the map that will show of pickup opportunities, eight
legitimate Republican pickup opportunities. Run through that list, and
then look at the Democrats.

MR. TODD: Well, in the Senate. And you do have these, these eight
races. Look, they feel very good about some of them that are
environmentally driven, which is like Arkansas, Blanche Lincoln. This is
a state that voted in huge numbers for McCain. Obama did very poorly
there. You have all the appointed Senate seats that they feel
like--three of the four, they feel like they have a good shot at, which
is Joe Biden's Senate seat in Delaware, especially if his son doesn't end
up running. He still hasn't formally announced. The Byron Dorgan
retirement, that has people worried that people like Beau Biden will say,
"Well, jeez, if he's having second thoughts, maybe I will." But Colorado,
appointment there of Michael Bennet, a political novice, not gone well.
Illinois, they don't have any A-list Democrats there running in that
primary. It's going to be kind of a messy primary. That's Barack
Obama's Senate seat. So you put all of those together, and you see why
Republicans think they can pick four or five Senate seats up. The
problem Republicans have, though, is that they have their own
retirements. They had Kit Bond in Missouri, they had the Ohio retirement
of George Voinovich, they have Judd Gregg in New Hampshire. So they have
their own vulnerability. So them having these huge gains seems a little
bit out of the realm.

MS. MITCHELL: And, you know, what--you saw what happened in New York
state just in that congressional district. Which Republican Party do
they belong to? Which Republican shows up? Arnold Schwarzenegger, more
than anyone else, shows you the different kind of Republican who doesn't
want the partisanship, who isn't willing to just attack Barack Obama on
any given question, who would point out that on intelligence and the war
on terror, that he's doing the best that he can.

MR. TODD: Schwarzenegger couldn't win a Republican primary right now.

MR. GREGORY: Right. But...

MR. TODD: That kind of Republican cannot win a Republican primary
anywhere in the country.

MS. MITCHELL: But that, that tells you...

MR. GREGORY: But the Republicans are still in some disarray about what
they want their party to be.

MS. MITCHELL: Exactly.

MR. GREGORY: And you had the chairman of the party saying this week that
he didn't think they could retake the control of Congress.

MR. TODD: Well, they're trying to embrace the tea party movement. This
is fascinating in that they, they want to embrace it on one hand, but
then you have the establishment in Washington nervous about them at the
same time because, you know, you do wonder, are they eating their own,
right? And we look at this Florida Senate primary as going to be sort of
front and center of the tea party movement vs. the establishment, got
the popular governor, Charlie Crist, a moderate, Marco Rubio, the
favorite of the conservatives.

MR. GREGORY: The politics will dominate a lot of this year, but also,
Andrea, what the president's gone through this week with the aftermath,
the fallout from this Christmas Day terror plot. David Broder wrote in
his column on Friday this about the president: "The Christmas plot
appears to have shaken Obama like nothing else that happened in his first
year. When he allowed the White House to quote his warning to his
Cabinet colleagues that another `screw-up' like that could not be
tolerated, he seemed to signal that his benign leadership style had
reached its limits." This is a priority now.

MS. MITCHELL: It's a priority, and it clearly was he, Barack Obama,
taking charge of this national security team, not just being a passive
recipient of briefings, but really saying, "What are you doing?" "What
are you doing?" "Who's talking to whom?" Let--you know, "This is your
last warning. You guys have got to change things. You've got to start
communicating better." It wasn't, obviously, that they didn't have the
information. The analysis was not tough enough, it wasn't timely.
They've got to be much more rapid. And with this new--with all the new
technologies, they've got the tools to do it. The people were just not up
to the job.

MR. GREGORY: And now a new warning out this weekend about a reminder of
the threats that come not just from Somalia and from Yemen, but also from
Pakistan and Afghanistan.

MS. MITCHELL: And this brings it home because al-Qaeda, we've been
saying, has become franchised, and they have gone from al-Qaeda central
to these other countries, Yemen and Somalia. But here you've got the
martyr/suicide video of the man who did such incredible, grievous damage
to our CIA forces in Afghanistan in the bombing in Khost, and he is posed
next to the leader of the Taliban in Pakistan. This is a retaliation
from them. They're now going international. They're going after this
target in Afghanistan in a way that they never have before. It shows you
how they have stepped it up, and we have to get ahead of the game. And
right now, we are on the defensive. Now we have to look at everything in
our, in our arsenal, because if they penetrated so deeply, now we have to
look at ever other asset we have and wonder who out there is also a
turncoat.

MR. GREGORY: And how did the president come out of this week then,
Chuck?

MR. TODD: Well, look, I think we shown where he's at this point in the
presidency where you do nothing almost but react to events on the ground.
You--he doesn't have the ability anymore, I think, to set an agenda in
the way that you--that first year presidents do. We're truly in this
sort of second year in the rest of his presidency, reactive, really
quickly on this. That Fort Hood review is going to be fascinating when
it comes out. When that comes out in those congressional hearings,
that's when we may see some heads roll in the intelligence, investigative,
security community, whether it's domestic FBI or international with the
DI or the CIA.

MS. MITCHELL: For missing the signals on Hasan and al Awlaki.

MR. TODD: Missing the--the missed, the missed signals on Hasan are very
similar to the missed signals on the Detroit bomber.

MR. GREGORY: Chuck, before you go, Harry Reid, the majority leader,
already facing a really tough re-election in 2010. Now, as we referred
to early on in the program...

MR. TODD: He does. And, you know, if he weren't Senator majority
leader, we would be talking about what kind of pressure is going on, what
kind of whisper campaign is going on behind the scenes to get Harry Reid
to do the right thing and retire. The problem is he's the majority
leader. That would send such a crazy signal to a party that is on the
brink of looking like it's in disarray politically right now, so they
couldn't afford to have it. But, you know, Harry Reid's been a gaffe
machine in the past and he's gotten over it, but you do wonder, if he
somehow wins re-election, he would be doing something that an incumbent
senator, I don't think, has done in 50 years, which is recover from a
double-digit deficit. It doesn't happen.

MR. GREGORY: Does it hurt his relationship with the president?

MR. TODD: I don't--you know, not getting health care done would hurt his
relationship with the president. I mean, you know, Harry Reid has said a
lot of dumb things behind the scenes to the president in the past, and
the president's a pretty forgiving guy.

MR. GREGORY: We're going to leave it there. Thanks to both of you again
for coming out here with us.

Want to mention, a special program note. Be sure to watch the debut of
"The Daily Rundown," hosted by our White House team, Chuck Todd and also
Savannah Guthrie. It starts Monday morning at 9 AM on MSNBC. And their
exclusive guest on day one, White House Chief of Staff Rahm Emanuel.

And we'll be right back.

(Announcements)

MR. DAVID GREGORY: That's all for today from California. We'll be back
next week from Washington. If it's Sunday, it's MEET THE PRESS.